That is the most common question an insurance agent gets from employers. The answer to this question is not simple. It can depend on several factors, including:
- Whether the state has approved the experience rating adjustment (ERA) in the experience modification formula.
- Whether the employer has expertise in paying according to the state fee or reasonable and customary schedule, and whether the employer has access to discounted medical networks, as insurance carriers do.
- Whether a small deductible to handle small medical claims might beappropriate and assist in complying with state rues.
- State rules and penalties where the employer is located.
- Whether the state of operation has a favorable alternative option for handling small medical claims.
- How organized and detailed the employer is?
Experience Rating Adjustment (ERA)
For years, insurance agents recommended that employers pay small workers compensation medical claims out-of-pocket and not submit them to their insurance carrier. The rationale was that frequency affects the experience modification formula more than severity does, so frequent claims would produce a higher experience modification and increase costs.
When the experience rating formula was created, assumptions were built into it. One assumption is that one large claim should not have as much effect as a number of smaller claims that total the same amount. For example, a single $90,000 claim should not have the same impact as five $18,000 claims. One large claim may not reflect the insured’s overall operations. However, five $18,000 claims indicate a problem with safety or other issues. In addition, studies have shown frequency often leads to severity.
The practice of employers not reporting small claims in an attempt to keep their experience modification low troubled many of the workers compensation stakeholders (insurance companies, actuaries, OSHA, National Council of Compensation Insurance [NCCI] and other state independent advisory organizations). The lack of reporting meant that the database of loss experience was not complete, possibly leading to poor statistical analysis.
To address this issue, an experience rating adjustment (ERA) was introduced into the formula. In states where ERA is approved, medical-only claims (injury code 6 claims) are reduced by 70% before being used to calculate experience rating. Also, the expected loss rate and discount ratio, used to compute expected losses and expected primary losses, have been changed to reflect that medical-only claims will be reduced by 70%. Many feel the incentive to not report medical-only claims has been eliminated in states where ERA is approved.
The ERA-approved states are: Alabama, Alaska, Arkansas, Arizona, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Maine, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, West Virginia and Wisconsin. The District of Columbia has also approved ERA.
Those that have not approved ERA are: California, Colorado, Delaware, Massachusetts, Missouri, New Jersey, New York, North Dakota, Oregon, Ohio, Pennsylvania, Washington, Wyoming and Texas.
After analyzing “what if” scenarios on employers either reporting to the carrier or paying medical-only claims on their own, studies conclude that the employer did not save money by paying medical-only claims. This was even truer in ERA states, particularly if the employer does not know how to apply the state fee schedule or has no access to discounted networks like those developed by insurance carriers.
The above illustration is representative of the reduction that would be realized on the $13,981 in medical bills had they been applied against the state fee schedule and insurance company network discounts. After these discounts, the total claims in the modification formula at 30% would be $1,846 ($6,152 x .30 = $1,846), reducing the modification from 1.275 to 1.20 vs. the 1.18 experience modification without reporting medical-only claims. No doubt reporting no medical claims produces a lower modification; however, many employers have no knowledge of how to apply the workers compensation state fee schedules and will not have access to insurance carrier discount networks. This often results in the employer paying higher medical costs and higher overall worker compensation costs.
Employers could arrange with a third-party fee schedule company to assist with state fee schedules, but this would depend on the volume of work. It may be awkward to engage a fee-schedule company without a formalized program to allow the employer to pay its own medical claims under a deductible program. Alternatively, the employer can look up the fee schedule amount by procedure code and fee schedule.
The employer will have to know how to create an “explanation of benefits” for the medical provider. In summary, some knowledge is required if an employer is going to take advantage of state fee discounts in paying its own medical claims.
Potential Risks and Penalties
Clearly, an employer paying its own medical claims in non-ERA states presents a more attractive option than doing so in ERA states, as the impact on the experience modification is greater. However, there are several factors to consider. There is always a risk the claim could become more serious. Many states have distinct periods of time that allow for a claim denial. If the claim becomes problematic or significant medical is needed, or if an employee becomes disabled (and the condition can be tied back to the original medical claim), the employer may lose the ability to have the claim denied at a later date because of the state’s statutes.
In addition, many states have penalties that apply if the employer does not report the claim to the carrier or the state. Arkansas issued bulletin warning employers, insurers and other workers compensation stakeholders against the practice of businesses paying small workers compensation claims directly, saying the practice was in violation of Ark. Code Ann. Section 11-9-106(a), which deals with making materially false representations for the purpose of avoiding payment of the proper insurance premium. The law authorizes insurers to offer a deductible to policyholders, but the law does not authorize direct payments, with or without a valid deductible program. The bulletin emphasized that even with an authorized deductible program all claims must be submitted for “first dollar” payment by the insurer. Other states require all incidents must be reported even if “notice only.” In other states, the doctor reports the claim to the state with a copy to the carrier of record so the opportunity to pay your own medical claims is certainly more challenging. An employer must also be aware of penalty situations in its states regarding timeliness of payment. For instance, in Michigan, as in many other states, the bill must be paid within 30 days of receipt.
Most states have approved the use of small-deductible plans. Currently, 36 states (Alabama, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Illinois, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota and Tennessee) have state-approved small-deductible rules ranging from $500 (Oregon) to $25,000 (Missouri, Ohio and Texas) for medical and indemnity.
In some states, an insurer is not required to offer a deductible if the employer’s ability to make payment of the claims under the deductible is in doubt. Some states have specific requirements for small-deductible plans while others allow insurers to file their own plans. In Arizona, Idaho, Louisiana, Michigan and Mississippi, insurers are permitted to file small-deductible programs, but most carriers haven’t. North Dakota, Washington and Wisconsin are notable exceptions as states not allowing small-deductible plans.
In return for assuming a deductible applicable to every claim, the employer receives a premium credit. These plans are extremely popular as a cost-cutting tool for many employers, especially contractors. Sometimes, underwriters use deductibles as a defensive tool, or the employer reluctantly accepts a deductible, as it may have been the only way to obtain a competitive premium. A deductible is simple to manage from the employer’s standpoint. Claims are submitted to the carrier.
The carrier pays the claims after applying the state fee schedules and other network discounts. The employer is billed at the end of the month for reimbursement of the claims under the deductible amount.
Selecting a small deductible is not always a pricing consideration. A company may be more attractive to a carrier if it is willing to take on a small deductible. This is especially true of contractors.
Whether the claims under the deductible go into the experience modification depends on the state the employer is located in. Currently there are 15 NCCI states offering net deductible options for small deductibles: Alabama, Colorado, Florida, Georgia, Hawaii, Iowa, Kansas, Kentucky, Maine, Missouri, New Mexico, Oklahoma, Rhode Island, South Carolina and South Dakota.
Small-Deductible-Programs Reference Table
The following NCCI table provides a summary of the small deductible programs in the states where the Basic Manual applies. For complete details regarding the rules of any program, refer to the appropriate state pages.
Alaska, District of Columbia, Idaho, Louisiana, Mississippi and Oregon have not filed programs with NCCI.
So what does net vs. gross mean? Assume the employer is in Kentucky, a net small-deductible state. The employer signs up for a small deductible and gets a small premium credit. It sends the bills to the carrier, and the carrier bills for the amounts under the deductible at the end of the month. When the claims activity for this employer is reported to the NCCI, it is reported “net” AFTER the deductible has been applied. If the employer had a $500 deductible, a $400 claim would show up at the NCCI as $0 and a $1,000 claim would show up as $500. (Remember this is after the state fee schedules and carrier cost containment networks have been applied, so it could have started out as a $3,000 medical claim).
Some states require insurers to report losses on a gross basis, which is the full amount paid by the insurer, irrespective of deductible reimbursements received from the employer. In a gross state, say Indiana, an employer can sign up for a small deductible and get a small premium credit. When this employer’s claims are reported to the NCCI, they are reported “gross” — as if no deductible existed.
Assuming the same claim scenario — a client with a $500 deductible — the $400 claim is reported to NCCI as $400 and a $1,000 claim shows up as $1,000 for experience modification purposes even though the insured is reimbursing some of the claim under the deductible.
Gross means reported without regard to the deductible. Net means reported after the deductible is applied. Net reporting of losses may allow an employer to receive a premium discount up front and favorably affect its experience modification factor by eliminating all losses below the deductible from experience rating.
So what does it mean when a state is a gross and net state? The NCCI Basic Manual will refer you to the state pages for further explanation. It can be for several reasons:
- In Florida, for instance, only a $2,500 deductible is “net.”
- Some states are net for medical-only and gross for indemnity.
With so many states offering small deductibles for medical-only claims, it is difficult to understand — particularly in an ERA state — why any employer would not formalize a small-deductible plan and take the advantages of the state fee schedule and carrier network medical bill discounts as well as the carrier premium credit allowed for small deductible plans. This is especially true in those states that have approved ERA, have net deductible plans and also give a credit for the deductible program. These include Kansas, Kentucky and New Mexico.
With the expanded format of the unit statistical report approved in most states, losses are reported on both a gross and net basis. Thus, insurers report the same information in all states regardless of whether gross or net losses are used to calculate experience modifiers.
There is usually a reason why a state did not approve ERA. Some states have a mechanism in place to handle employers paying small medical claims that reduce medical claims included in the experience rating calculation.
Employers are allowed to pay the first $15,000 of any medical-only claim. Ohio also allows employers “salary continuation” which allows an employer to pay an employee his or her regular wages after a workplace injury or illness occurs. No salary continuation payments or medical-only claims paid by the employer under the $15,000 go into the modification calculation.
Oregon has a medical reimbursement option that allows interested employers to reimburse medical-only claims up to $1,500. Any reimbursed medical losses are removed (or reduced) from the experience rating.
Missouri law allows employers the right to direct the medical care for their injured workers and to pay first-aid-type claims that are $1,000 or less out-of-pocket. By paying claims under $1,000 out-of-pocket, the frequency and cost of these claims are not included in the calculation of the experience modification. There is a special NCCI endorsement that is attached to the policy.
The bill is submitted to the carrier. The carrier reprices the medical bill according to the state fee schedule and network discounts. This is true even if a bill is $1,200 but ends up being $800 after re-pricing. The claims under $1,000 do not get reported on the experience modification.
Some carriers operating in Missouri that have a higher deductible plan (i.e., $2,500) in place with an employer will allow the employer to reimburse the bill and not report the entire bill to the experience modification. They count the first $1,000 under the Missouri law and the balance of the deductible as subrogation. Any lost time claim or a claim where it is known that a permanency rating will apply (i.e., fracture) must be reported even if under $1,000.
The Missouri system has worked well for employers. It is an example of how an employer may have a different approach to paying small medical claims or decide not to pay them at all depending on the state they are located in.
Medical-only claims are subject to a deduction equal to twice the average medical-only claim cost. The amount changes each year (2014 is $2,610). The claim cost will be deducted from the loss amount before beginning any other calculations on the claim. Ultimately it reduces the regular experience modification calculation.
No employer’s experience modification can increase or decrease more than twenty-five percent during any one year. However, if an employer’s experience modification factor is calculated to be below 1.00 without this twenty-five percent limitation and that employer had an experience modification factor greater than 1.333 in the previous year, then the experience modification factor shall be set to 1.00
California employers have an option to self-pay certain workers compensation claims. Specifically, first-aid claims. Even though there is no premium reduction to pay first aid claims out-of-pocket, this practice may have a positive effect in minimizing the impact on future experience modifications, and reduce the future cost of premiums.
Several states – Alabama, Kansas, Kentucky, New Mexico, Oklahoma and Rhode Island) offer a unique opportunity in that they approved ERA (70% discount for medical-only claims), they allow a credit for the small deductible and they do not include claims under the deductible in the experience modification.
Advanced Monitoring of the Experience Modification
It is important to note that the 70% reduction applied to medical claims for the experience modification in ERA states is only for a medical-only claim. As soon as an indemnity (lost wages) payment is included, the entire medical portion of the claim goes into the experience modification formula. Once the waiting period has passed to collect lost wages (anywhere from 3 to 7 days depending on the state) lost wages are paid back to day one. There are occasions when a claim may result in only 5 or 7 days off or $300 to $900 of indemnity payment but the medical is high (i.e. $10,000). Hernia operations are an example of short time off but large medical expense. If the employer were to continue to pay this individual for the week or two off and report only the medical to the carrier, only $3,000 of the medical would apply to the experience modification.
This feature of the formula highlights the importance of returning employees to work as soon as medically possible and when not medically possible, managing that one-to-three week period of wages. There is software available that can calculate a variety of “what ifs” to determine the cost saving advantages to paying close attention to this issue.
Once again the employer and agent must be aware of what the state of operation allows. Wisconsin issued a warning to employers that they cannot pay wages to injured workers to lower their experience modification. The claims must be paid by the workers compensation carrier. Wisconsin does not allow deductible plans and this action constitutes use of a deductible which has not been filed by the bureau and approved by the Office of the Commissioner of insurance for use in Wisconsin. The office warned it will pursue appropriate enforcement action about any practices noted as improper.
Medicare — Responsible Reporting Entity
In addition, employers must now contend with the rules from the Center for Medicare and Medicaid Services (CMS). But first, a little history. Federal Medicare set-aside has been in force for many years. What is in place is a process that was activated when a workers compensation settlement on a claim was imminent on an individual who was collecting Medicare because they were of Social Security age or disabled or when there was a reasonable expectation an individual would be eligible for Medicare within 30 months of the settlement time.
When these circumstances existed on a settlement of a workers compensation claim, the carrier or TPA was required to assemble medical records on this individual and send them to a company that would assess the future medical and prescription drug use only relative to the workers compensation injury (not everything covered by Medicare is covered by workers compensation).
When the employee receives his/her lump-sum workers compensation settlement a non-interest bearing bank account is also set up with the assessed amount for future medical and prescription (but no indemnity or impairment). The settlement “set-aside” (hence the name) pays bills and the employee keeps receipts. Any medical bills not paid but eligible for Medicare are then paid by Medicare.
The Secondary Payer Act was passed by Congress under George Bush. Medicare was always intended to be a secondary payer not primary but the only time this was getting done was in workers compensation settlements. Usually a denial or a delay (by way of lawsuit) of a workers compensation, general liability or automobile claim sent an eligible individual to Medicare. Medicare conditionally pays with the expectation of being reimbursed if and when a lawsuit is resolved with the workers compensation, general liability or automobile carriers.
Unlike workers compensation settlements set-aside, there was no formal method to recover what Medicare paid when the lawsuit settled. Medicare is now requiring reporting of all open general liability, automobile and workers compensation claims if another primary source of recovery is available for Medicare eligible claimants.
So this brings us to employers paying their own small medical-only claims or lost wages. An employer risks becoming the responsible reporting entity with all the burdensome reporting requirements when paying their own claims unless they adhere to the strict rules where workers compensation is exempt under ongoing responsibility for medicals (ORM) for minor incidents.
Workers compensation claims are excluded from reporting indefinitely if they meet all the following criteria:
- Claim is for “medicals” only.
- The associated “lost time” for the worker is no more than the number of days permitted by the applicable workers compensation law for a “medicals only” claim (or 7 calendar days if the applicable law has no such limit).
- All payments have been made directly to the medical provider.
- Total payment for medicals does not exceed $750.
The employer needs to evaluate whether saving a few dollars on their experience modification is worth tracking and carefully following these rules. If the employer pays any medical over $750 and the employee is Medicare eligible the employer could be creating more headaches with reporting/tracking etc than the experience modification savings is worth by paying the bills instead of sending to the carrier.
The carriers and TPAs have experts that have implemented these new rules and will have this streamlined. There are many companies now offering reporting services. Failure to report a claim carries a $1,000-a-day per claim penalty.
The variances among states dictate that there is no one, simple answer to the employer’s quandary of whether to pay small medical-only claims or turn them in to the insurance carriers for payment. An employer must weigh the advantages and disadvantages of paying small medical claims after:
- Obtaining a complete understanding of their state’s laws.
- Understanding the CMS rules.
- Evaluating the staff’s ability to effectively manage their own medical bills.
- Reviewing the insurance alternatives available (small deductibles) that take paying small medical claims into consideration.
Information in this article is provided as a reference only. While I strive for accuracy, the workers compensation world is constantly changing. Consultation with the governing authority or an attorney for verification is advised.